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Payday lenders told the Consumer Financial Protection Bureau on Tuesday that they will accept new regulation so long as it does not "cripple" the industry and credit availability.
March 25 -
E-commerce and payments companies are edging into the small-business lending territory long dominated by banks. If banks want to stay relevant, they need a simpler, speedier lending process.
June 3 -
Firms that offer speedy, but pricey, loans to small companies say business is booming because bank lending to the sector remains tepid.
December 17 -
Online lender Fundbox announced its official launch Thursday after securing $17.5 million in funding from a group of investors led by venture capital firm Kholsa Ventures.
April 10
According to recent estimates, the subprime business loan market has grown to over
Subprime business loans can indeed be risky. The problem is that alternative loans are a crucial resource for many entrepreneursparticularly startups. Many startups cannot obtain funding through the Small Business Administration's 7(a) loan program. The time and paperwork involved in securing a loan may be too much for startups experiencing rapid growth to handle, or they might not yet qualify for traditional loans from banks. The solution, therefore, is not for alternative lenders to stop financing subprime borrowers but to ensure that borrowers are able to access loans at competitive rates.
Small businesses need access to capital in order to succeed. Startups that receive subprime loans are much more likely to survive, generate higher revenue and create more jobs than startups that do not receive funding, according to a forthcoming study of data from the San Antonio microfinance institution Accion. Loans are even more important for survival among subprime business owners with more education and less managerial experience, according to the
These borrowers shouldn't have to take on exorbitant costs in order to receive credit. The hefty interest rates and fees currently charged by some alternative lenders may reflect a lack of competition from other creditors rather than the riskiness of the borrower. Some alternative lenders also charge expensive interest rates in order to hedge against risk because they lack information about the creditworthiness of the borrowers. However, given that alternative lenders including OnDeck and Kabbage can estimate the likelihood that borrowers will repay their loans by pulling information from their bank accounts, accounting programs and other online resources, there is less justification for charging excessive rates.
A few measures could protect both small business borrowers and lenders from taking on too much risk. One option is greater regulation at the federal and state level, along the lines of the
A better option is to encourage financial innovation that will allow lenders to provide credit to growing businesses at competitive rates. Square's recently announced
Because alternative loans are important for new businesses, financial innovation should be encouraged through regulatory restraint. Regulators should take a wait-and-see approach and avoid setting interest rate caps in order to see how profit incentives can improve the market.
Small businesses and entrepreneurship have been an essential element of the success story of the U.S. economy. Providing adequate financing is necessary to continue this success. The solution, as is typically the case, will come either through government actions or the operation of market forces and incentives. Though markets are not always perfect and government action is sometimes required, caution should be exercised in order to allow potentially beneficial financial innovation to occur.
Ronnie J. Phillips is professor emeritus of economics at Colorado State University and recently edited a six-volume series on the history of credit and payments in the U.S. for Pickering & Chatto.